Among the arguments about instituting a capital gains tax in NZ (common in many parts of the developed world) is the claim that much property is family residence or inheritance in nature. The argument goes that it is unfair to not differentiate between the sale of a family home, granny flat or holiday residence by middle and working class people and the sale of properties bought by developers and speculators with the intention of “flipping” them for a profit. The first category are long-term, emotionally laden investments whereas the second is simply about making money.

I see merit in the argument for differentiation of property investment categories. In particular, I see a difference between legacy investments and speculative investments. Legacy investments are those where property is bought for family use over time. These can be the main family home but more often are second, smaller flats or holiday homes that are passed on between the generations (think of the archetypical bach or a crib). The emotional as well as financial investment in such places is not based on eventually securing returns but on preserving collective experiences and traditions from generation to generation and giving off-spring the chance to acquire a property stake without the exorbitant financial costs associated with the contemporary real estate market (for example, an equity share in a family bach may help towards securing a first time mortgage loan). It specifically excludes using family members as fronts for speculative purchases (say, of a family farm).

Speculative investments are just that: property investments that are designed to be on-sold in a relatively short period of time in order to secure a positive financial return. Here the intention is to make short-term money off of the buy/sell transaction.

I would suggest that a capital gains tax is appropriate for all speculative investments. They become another cost of playing the real estate flipping game and will eventually be incorporated into the real estate price architecture. On the other hand, I do not think that capital gains tax is appropriate for legacy investments. If a family property is on-sold within blood lines or divided into part ownerships to children and grandchildren, it seems to me that the less financial burden imposed the better for all. People get to keep their properties within the family and share in the collective benefits over time and generational change. That includes rental income from family owned property subject to the requirement that the property must be used by family members for given periods within a specified time frame (this would allow seasonal rentals and other short-term lease arrangements to non-family).

The system would work if there is a legacy declaration made on a property at the time of purchase. Again, this may be less appropriate for a main family home that could likely be on-sold to strangers as the family demographic shifts. There a capital gains tax would apply. But it very much should not apply to properties that families hope to preserve within the bloodlines for posterity. Here on-selling to relatives should not incur capital gains taxes.

On-selling under the legacy clause will require verification of family lineage, and any sale to non-family voids the legacy declaration and makes the sale subject to capital gains tax. Those who try to cheat the system and are caught will be subject to heavy financial penalties in excess of the tax otherwise to be paid.

I am not an economist much less a taxation expert but it seems to me that distinguishing between legacy and speculative investments in the property market strikes a good balance between profiteering and homesteading. I admit to not having thought through all of the implications inherent in this proposed scheme so if any readers want to illuminate me please feel free to do so.

I have no doubt that clever devils will immediately try to game the system and seek out ways to turn legacy homesteading into profit-driven speculation. But with a detailed code of compliance and robust enforcement regime in place, it is possible for this approach to split the fair difference between an all or nothing capital gains tax on property and one that reflects the nuances in property buying preferences. Or perhaps that is simply too much to ask in an ideological climate where the very idea of taxing something other than salaried income, business earnings and consumer purchases and services is considered sacrilegious by the Right.

PS: I have been informed by the smarter adult in my house that this is a silly idea and unworkable. She also points out that trusts already allow for inter-generational transfers of wealth/assets without being subject to tax on the transfer. I am not familiar with trust law and am not going to risk savaging by pointing out that family trusts are something more likely to be created by the well-to-do rather than the middle class, so must accept the scolding and move on. If anyone is familiar with the intricacies of trusts, please feel free to explain.